Indicators Say Market Top Not Near

As the bull market has run longer and higher, many have been speculating about whether we’re nearing a market top. In a recent Bloomberg View column, Barry Ritholtz turns to Paul Desmond of Lowry’s Research — who has been analyzing markets for five decades – for some cold, hard data on the topic.

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Ritholtz On What To Learn From The Gold Bust

After a huge decade-long runup, gold has tumbled in recent years, pounding portfolios of many gold bugs. “The mania for gold, like all manias preceding this one, is ending badly,” Barry Ritholtz of FusionIQ and The Big Picture blog explains in a Washington Post column. “And while gold may yet establish a comeback, much of the damage has already been wrought.”

Ritholtz says the gold bust is a good learning opportunity for investors, however, as it provides several broader lessons. Among them: Beware the narrative (investors get attached to powerful stories even after the facts change); don’t ignore history (no investment goes up forever); and don’t guess (unlike equities, gold has no  fundamentals, so many tried to guess how its price would change based on nearly impossible to predict macro factors).

“The ups and downs of gold over the past 10 years are not unique,” Ritholtz says. “Like any other investment, people became emotionally involved with the trade. Mistake were made, money was lost.”

Ritholtz on the Folly of Forecasting

When it comes to market and economic forecasts, top strategist Barry Ritholtz has some advice: Ignore them.

“The simple truth is that, as a species, you humans are terrible about making predictions,” Ritholtz writes in a Bloomberg column. “Forget forecasting big events that are not in your control, such as the economy or the market, you cannot even forecast your own behavior. If you could, the fitness and diet industries would be bankrupt.”

Making predictions, Ritholtz says, can set the stage for dangerous behavioral biases. “The true danger of forecasting is not that you will be wrong — the odds are you will — but rather the natural tendency to stick to a forecast regardless,” he says. “Instead of adjusting to changing conditions, we have the odd tendency to marry the old prediction.”

Ritholtz on the “Most Hated” Rally

Barry Ritholtz says that too many investors are underinvested in stocks, saying that the market rally has been “hated” by many. Ritholtz tells Bloomberg that pullbacks are a part of bull markets, but investors seem to take every minor pullback as a sign off disaster these days. He talks about how difficult it is to jump back into the market at the right time after you’ve jumped out. And he talks about how a myriad of factors drive the market — not just one, as the headlines often make it seem.

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Ritholtz Not Sweating the Shutdown — for Now

Though the government shutdown and debt deal drama are monopolizing the financial headlines, Barry Ritholtz of The Big Picture blog says it’s had little impact on his investing approach. And it will stay that way, he says — so long as the stalemate doesn’t last longer than a few weeks. Ritholtz tells Yahoo! Finance’s Daily Ticker about a study that looked at 17 past government shutdowns, and how stocks responded to them. He says that in most cases, the shutdowns were just a blip on the radar in terms of what they did to the market. “Where it becomes a concern … is if weeks turn into months,” he says. “If it goes past three or four weeks, that could take a big chunk off GDP, effect consumer confidence and really have an impact on earnings.” A big negative pull on earnings could mean a potential 20% to 30% decline for stocks, he says. If the standoff does last more than three or four weeks, Ritholtz says he’ll probably start lightening up on his equity holdings and looking at ways to hedge his portfolio. But until then, he appears to be staying the course.

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Ritholtz: Don’t Be a Muppet

In a recent Washington Post column, Barry Ritholtz says that too many investors are still getting victimized by “muppet portfolios”.

“Muppet portfolios,” Ritholtz says, are portfolios “assembled for the sole purpose of maximizing commissions to the retail broker, period.” He talks about the way Wall Street assembles these  portfolios and pitches them to unsuspecting retail investors. “About 10 percent of the new accounts that we see are muppet portfolios,” he says. “These typically hold hundreds of positions. Mind you, these are not from a family office with $150 million, but a portfolio 1 percent of that size. There is no rational reason for these sorts of assemblages to be holding 100-plus positions.”

Ritholtz says that investors are far better off by diversifying through low-cost funds. He suggests owning what he says are the 15 broad asset classes — including different types of stocks, bonds, Treasuries, commodities, and more. “You want to own all of these because from year to year, no one ever knows which asset class is going to perform the best,” he says. “And no one can tell in advance which asset class is going to have a bad year. So you own them all, and you don’t worry about it. Much of what you own is going to be going up most of the time.” He says the great thing about diversifying is that it’s “about as close as you can get to a free lunch in investing” because of the ability to buy index funds or ETFs focusing on these broad asset classes at extremely low costs.

Ritholtz Sees Long-Term Value In EMs, Europe

Barry Ritholtz of Fusion IQ and The Big Picture blog says he’s dialing back a bit on U.S. stocks, and making bigger pushes into two unloved areas of the market: emerging market stocks and European stocks. “[Emerging markets] are the cheapest markets that are out there. They’ve gotten absolutely shellacked,” he says. “We love when markets get shellacked because it makes things attractive for long-term purchases [those with a 5 to 7 year horizon].” Ritholtz says he’s now at equal weight on U.S. equities, and is overweighting EM and European stocks. He’s investing in those areas through broad index funds that diversify risk over many countries, noting that many EM funds focus too heavily on the BRIC countries. Ritholtz also had this to say in a recent letter to clients: “Rather than focus on the headlines, which tell us only what has already happened, we are much more interested in valuations. Valuation trumps macro-tourism every time. Our asset allocation models are currently maintaining their weightings to Emerging Market equities, despite their recent unpopularity, and we are actively investing in Europe. We know this will require patience on our part, but we believe it will pay off over the long term. We feel that behavior, not a focus on the news of the day, is what separates good investors from the rest of the pack over time.”

 

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